Time and Material vs. Fixed Price – how to settle accounts with a software house?

Fixed Price – Pros and Cons

The Fixed Price model, or “fixed price”, is nothing more than a predetermined rate for the entire project. The valuation is made on the basis of the client’s expectations, the work schedule created and the scope of tasks to be performed. This is a popular model of settlements with a software house, which has many advantages – above all, it significantly facilitates budget management. The client, deciding on Fixed Price, knows exactly how much he will pay for the project and can include a specific amount in the calculations.

Unfortunately, cooperation on the basis of Fixed Price also has disadvantages. First of all, software houses using this model always present a price slightly exceeding the actual cost of the project. In this way, they ensure the profitability of the order in the event of unforeseen complications, which are in fact unavoidable with complex projects. Thus, the price, although known in advance, may not be the lowest. Secondly, there are times when it is necessary to make changes during the execution of the engagement that were not included in the initial assumptions. Adding new functionalities, in turn, often means changing the specification, and thus – the need to renegotiate the terms of the contract. It may then turn out that the budget set at the beginning will be exceeded or the client will be forced to give up significant changes.

It should also be mentioned that projects settled in the Fixed Price model are always preceded by detailed analyzes. It is necessary to prepare the valuation and contract. However, this means that projects start with a significant delay. Pricing based on Fixed Price is especially difficult for less experienced teams, who even abandon the project when the contract turns out to be unprofitable for them. Another disadvantage of fixing a fixed price is that billing usually takes place after the entire project is completed, which prevents it from being released early in beta to test or generate first profits.

Time and Material – advantages and disadvantages

Time and Material is a model that assumes cooperation based on an hourly rate. It is most often used for projects that are more demanding and in which it is difficult to determine the exact size and scope of work at the beginning. Settlements are made at the end of the period specified in the contract, based on a time report. The advantage of this solution is that it assumes payment for the actual workload. This way, the final rate, although unknown at the outset, may turn out to be more attractive than for a Fixed Price settlement. What’s more, Time and Material also allows you to make corrections and changes to the project on an ongoing basis, without the need to renegotiate the terms of the contract. Contrary to appearances, this solution allows for full control over the budget at every stage of the order, as well as flexible and free management of expenses and adapting them to the current capabilities of the client. In addition, not having to create a detailed specification at the beginning allows you to start working on your project faster.

Like Fixed Price, Time and Material has downsides. The greatest of these is the need to supervise the execution of the order by the client. For the Time and Material model to be profitable, the project must be supervised by an experienced person who is able to monitor the progress of work and communicate with the agency on an ongoing basis. This model should also take into account the risk of mis-estimating the initial assumptions. It may happen that the project turns out to be more demanding than expected and its implementation exceeds the client’s financial assumptions.

Time and Material or Fixed Price – what to choose?

Both the Time and Material model and the Fixed Price model have advantages and disadvantages. When choosing one of them, you should take into account factors such as: business conditions, project specificity, your internal resources, workload, as well as the conditions offered by a specific software house. So how do you choose the right model?

Choose Fixed Price when:

• Your project has a relatively short deadline, is quite standard and has a clearly defined end result,
• From the very beginning, you are able to prepare a schedule and scope of work to be performed,
• You do not have a person in your team who could control the agency’s work on an ongoing basis,
• You work with an experienced software house that is able to prepare an adequate quote.

Choose Time and Material when:

• Your project is custom, long-term, or does not have a clear end date,
• You have general assumptions about the project, but you are not able to determine the exact scope of work and schedule,
• You expect changes to the specification or direction of the project implementation during the course of changes,
• You want to start work quickly, without long arrangements and negotiations,
• You have the qualifications, technical knowledge and human resources to verify and supervise the work of developers on an ongoing basis,
• You have confidence in the software house you work with.

It is this model that we most often recommend to our clients. The Time and Material solution is in line with our flexible and agile approach to designing web and mobile applications. We consider them safe and beneficial for both us and our clients. We know from experience how dynamic work on a project can be, so we consider freedom in joint activities as a key element of cooperation. Thanks to Time and Material, we can also avoid long-lasting negotiations and analyzes and start implementing the project quickly.

If you are wondering which is better – Fixed Price or Time and Material, contact the selected software house directly to talk about your project, expectations and needs. An experienced partner will be able to advise you on a solution that will work best for your order. If you are still looking for a trusted technology team with whom you would like to implement a flexible and partnership approach to the project, please contact Da Vinci Studio.